Don’t Panic! Keep Borrowing!

Is the United Kingdom in denial about the extent of its personal debt problem?

Over the last six months, there has been a plethora of studies into the extent of the personal debt problem in the United Kingdom, with some stating that there is a problem, whilst others state that whilst debt levels may be a problem for those on lower incomes, the majority of debt that is currently being taken out is being taken out by those on higher incomes and is affordable. There is, therefore, no reason to panic.

In relation to that argument, however, it always comes with the qualification: it’s not a problem providing everything remains the same.

So what is the truth?

Take the quote below from a report produced by Citizen Advice, it states:

“…low rates of unemployment, low interest rates and soaring house prices have resulted in a substantial increase in mortgage and consumer credit lending. However lenders’ figures appear to show that the problem may be limited; for example the proportion of accounts in arrears has remained the same for the last 5 years”

This quote, however, is not from a report published in 2018 and doesn’t describe existing borrowing levels in the UK today, but those of 2003, and describes the consumer credit landscape that existed then. It is striking, in that, it describes circumstances very similar to those that exist today: Bank of England interest rates remain historically low; unemployment is the lowest since the early 1970s; and consumer borrowing is now approaching 2008 levels, with unsecured borrowing growing by 7% in the last 12 months.

Default rates are also not alarming anyone… yet.

Back to the past

However, like with the landscape of 2003, could Britons be walking into another debt crisis?

For example, some are already arguing that interest rates in the UK need not only continue to rise, but need to rise faster than they have been rising to-date, so if Britain does face another economic downturn or recession in coming years, it will be possible for the Bank of England to cut those interest rates back again and help kick-start the economy. The problem at present, however, is the Bank of England base rate is already at 0.5%, and, therefore, there is little scope for the Bank to cut them further should they have to.

However, the problem with this argument is if interest rates do begin to rise again and at a faster rate than they are currently expected to, many of those who have debts will begin to struggle with them. The Financial Conduct Authority, for example, has already warned that even modest increases will be too much for some people.

The problem is, no-one wants to undermine the current slow recovery of the UK economy, particularly in anticipation of the UK leaving the European Union, by discouraging consumer spending. The problem is much of the consumer spending we are presently witnessing is being driven by borrowing from credit cards, personal loans and car finance agreements. Our economic growth is literally being driven by personal borrowing.

Nine out of every ten new cars, for example, are being purchased by personal contract purchase agreements (PCPs).

So should we be slowing down our borrowing?

There is no clear answer to this question, as one of the benefits of the recent rise in consumer borrowing is there are more attractive finance deals available, whether that is interest free finance or low interest rate credit cards. Lenders are also prepared to lend again to people who they weren’t previously willing to. Whether someone borrows or not, however, is always a personal decision based on an individual’s circumstances and their attitude to risk.

However, is it not this creditor willingness to lend to people, whom they previously weren’t willing to, which is increasing the risk, like it was in 2003?

They say history does not repeat itself and it rarely does, but it does follow cycles, usually when people forget the lessons of the past.

There is no question that the UK is facing a personal debt crisis, as if the only safeguard against that crisis emerging is the hope nothing will change, then it is hope based on shaky foundations. Everything changes eventually.

It would maybe provide some comfort if it was possible to say that the emerging trend in the UK was towards increased savings and less borrowing, but the opposite is true. The real danger is that too many households are now being hooked on a lifeline of credit, like they were in 2003, and ultimately although it’s essential at present for the continuing good health of the UK economy, there will come a time when the opposite will be true and that lifeline will have to be cut.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.

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